towards retail private label success · towards retail private label success february 2002....
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TOWARDS RETAIL PRIVATE LABEL SUCCESSFebruary 2002
Coriolis Research Ltd. is a strategic market research firm founded in 1997 and based in Auckland, New Zealand. Coriolis primarily works with clients in the food and fast moving consumer goods supply chain, from primary producers to retailers. In addition to working with clients, Coriolis regularly produces reports on current industry topics. Recent reports have included an analysis of the impact of the arrival of the German supermarket chain Aldi in Australia, and answering the question: �Will selling groceries over the internet ever work?�
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The lead researcher on this report was Tim Morris, one of the founding partners of Coriolis Research. Tim graduated from Cornell University in New York with a degree in Agricultural Economics, with a specialisation in Food Industry Management. Tim has worked for a number of international retailers and manufacturers, including Nestlé, Dreyer�s Ice Cream, Kraft/General Foods, Safeway and Woolworths New Zealand. Before helping to found Coriolis Research, Tim was a consultant for Swander Pace and Company in San Francisco, where he worked on management consulting and acquisition projects for clients including Danone, Heinz, Bestfoodsand ConAgra.
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The coriolis force, named for French physicist Gaspard Coriolis (1792-1843), may be seen on a large scale in the movement of winds and ocean currents on the rotating earth. It dominates weather patterns, producing the counterclockwise flow observed around low-pressure zones in the Northern Hemisphere and the clockwise flow around such zones in the Southern Hemisphere. It is the result of a centripetal force on a mass moving with a velocity radially outward in a rotating plane. In market research it means understanding the big picture before you get into the details.
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CORIOLISRESEARCHPO BOX 10 202, Mt. Eden, Auckland 1030, New Zealand
Tel: +64 9 623 1848; Fax: +64 9 353 1515; email: [email protected]
2
Private Label
Private Label
“Private brands separate the quick from the dead.”
Mark Husson, Analyst, JP Morgan
3
Private Label
Private Label
Table of Contents 3
Document Overview 4
I. The Role of Retail Consolidation 5
II. Successful Strategies 12
III. Superior Results 24
Appendix: Case Studies
- Tesco 45
- Safeway (US) 57
- Loblaw 75
4
Private Label
Private Label
Successful supermarket retailers have strong private label programs
I. Growing retail consolidation and growing private label are intimately linked
II. The most successful retailers have more sophisticated private label branding strategies
III. Retailers with a strong value-added private label strategy are stronger competitors and produce better financial results
5
Private Label
Private Label
I. Growing retail consolidation and growing private label are intimately linked
Ia. Retail concentration drives private label growth
– Generally, retail concentration leads to greater private label penetration
– The countries that are the exception to this rule, other than Australia, have very strong wholesale and independent sectors
– As the United Kingdom demonstrates, this is a gradual, long-term process with private label penetration trailing consolidation
Ib. The profitability that private label generates, in turn, drives more consolidation
– The chains with strong private label programs have generally been the most successful consolidators
– Analysis shows that a strong private label program can double profits for the leaders, giving them the resources to make acquisitions
– Increasing value-added private label is one of the few means of getting sales andprofit growth in a highly concentrated market
6
Private Label
Private Label
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
40% 50% 60% 70% 80% 90% 100%
Generally, retail concentration leads to greater private label penetration
RETAIL CONCENTRATION VS. PRIVATE LABEL PENETRATION(Percent of supermarket sales; 20001)
Private LabelShare of Total Supermarket
Sales
Market Share of Top 5 Supermarket Groups
United Kingdom
Switzerland
Germany
Belgium
CanadaFrance
ItalyAustralia New Zealand
Spain
DenmarkNetherlands
Norway
1. Norway, Belgium and Switzerland use 1999 private label dataSource: PLMA; Nielsen; Euromonitor; FAS; Coriolis analysis
United States
Ireland SwedenPortugal
Austria
Finland
See next page
7
Private Label
Private Label
The countries that are the exception to this rule, other than Australia, have very strong wholesale and independent sectors*
ICA35%
Konsum30%
Axfood19%
Other16%
SUPERMARKET MARKET SHARE BY SELECT COUNTRY(% supermarket sales; 2000)
Sweden
Kesko38%
S-Group28%
Tradeka12%
Spar10%
Other12%
Finland
* The initial hypothesis here is that cooperative and wholesalers are generally less able to exercise the discipline needed to push private label Source: Nielsen; Euromonitor; FAS; Coriolis analysis
New Zealand Australia
Foodstuffs55%
Progressive24%
Woolworths19%
Other2%
Woolworths40%
Coles35%
Metcash15%
Other10%
Cooperative or Independent Wholesaler
Retailer and Wholesaler
Norges33%
Hakon28%
NKL25%
Reitan13%
Other1%
Norway
8
Private Label
Private Label
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
As the United Kingdom demonstrates, this is a gradual, long-term process with private label penetration trailing consolidation
GROWING RETAIL CONCENTRATION & THE GROWTH OF PRIVATE LABEL(Percent; sales; UK market; 1977-2000)
Market Share of Top 5 Supermarket Groups
Private label as a percent of supermarket sales
Source: PLMA; AGB; Nielsen; IGD; Coriolis analysis
9
Private Label
Private Label
The chains with strong private label programs have generally been the most successful consolidators
WHY STRONG PRIVATE LABEL LEADS TO CONSOLIDATION
Explanation
More Profitable
Add-value to acquisitions
Lower Prices
Gross Margins Private Label 35%Branded 25%
Able to consolidate & add value to other chains [US examples]Kroger (25%) buys Fred Meyer (17%)Albertsons (27%) buys American Stores (17%)Safeway (30%) buys Vons (13%)
Dominicks (11%)Randalls (13%)
Able to offer lower per unit prices on branded & private labelOffer the consumer a lower total basket priceOffer lower prices versus competition
Source: CIES; JP Morgan; Coriolis analysis
10
Private Label
Private Label
Analysis shows that a strong private label program can double profits for the leaders, giving them the resources to make acquisitions
Sales
% of sales…- Private label- Branded
Gross Margin on…- Private label- Branded
% of sales operating expenses
Operating profit
100%
30%70%
35%25%
23%
5.0%
StrongPrivate Label
THE EFFECT OF PRIVATE LABEL ON PROFITABILITY: A SIMPLE MODEL(Two hypothetical $30B supermarket groups)
WeakPrivate Label
$30.00
$9.00$21.00
$3.15$5.25$8.40
($6.90)
$1.50
% $B% $B100%
5%95%
35%25%
23%
2.5%
$30.00
$1.50$28.50
$0.525$7.125$7.650
($6.90)
$0.75
11
Private Label
Private Label
Increasing value-added private label is one of the few means of getting sales and profit growth in a highly concentrated market
WHY CONSOLIDATION LEADS TO STRONG PRIVATE LABEL
Explanation
Imitation
Implicit collusion is easier
Top-line growth is hard
Non-price competition
Retailers in Canada imitated the success of Loblaw’sRetailers in the UK imitated the success of Sainsbury’sRetailers in the US imitated the success of Safeway
Squeeze out smaller manufacturers Squeeze out tertiary brandsSqueeze out smaller retailers
Real sales growth is hard in a consolidated retail environmentPrivate label boosts the bottom line without sales growth
Fewer new stores being built - more non-price competitionPrivate label can be used to create a point of differenceUnique private label can attract and retain customers
12
Private Label
Private Label
II. The most successful retailers have more sophisticated private label branding strategies
IIa. There is one key divisions between private label branding strategies: the use of numerous quasi-brands or the use of a uniform store or group brand
– Quasi-brands, invented controlled labels with no store association, work most successfully in a limited assortment environment to create the illusion of selection
– Store brands, where all private label carries the name of the store, have been very successful at driving high levels of private label penetration in supermarkets
– Group brands, where all private label carries a common non-store name, are most commonly used by retailers with more than one store fascia
IIb. Through trial and error, most major supermarket chains appear to be evolving toward a two-tier, value added private label strategy
13
Private Label
Private Label
IIa. There is one key divisions between private label branding strategies: the use of numerous quasi-brands or the use of a uniform store or group brand
TWO MAIN TYPRES OF PRIVATE LABEL STRATEGIES
Quasi-Brands Store or Group Brand
Retailer uses 50+ different invented brands on private label products
AldiLidl
Netto
Retailer uses one uniform brand on all private label products
SainsburyAlbertson’s
Safeway
Definition
Schematic
Examples
14
Private Label
Private Label
Quasi-brands, invented controlled labels with no store association, work most successfully in a limited assortment environment to create the illusion of selection
QUASI-BRAND: STRENGTHS & WEAKNESSES
Strengths
• Create impression of wide product selection and range1
• Able to replace secondary and tertiary brands with own offering
• Shoppers do not associate product defects with store
• Low quality/low price approach does not create shopper loyalty
• Shoppers do not directly associate brands with store
• No track record of success outside limited assortment environment
– Cannot drive share over 18-20%– Must be lowest priced item on-shelf
to sell– Strategy abandoned by Kroger,
Safeway, Carrefour, others– Strategy currently failing at Winn-
Dixie
Weaknesses
1. As an unsuccessful counterexample: Loblaw’s opened a limited assortment store in Canada in the 1970’s painted yellow inside and out, filled with only it’s yellow generic brand; this concept failed
15
Private Label
Private Label
The experience of Kroger and Safeway, as well as numerous other U.S. supermarket groups, suggest that quasi-brands fail in a full range supermarket
QUASI-BRANDS: A FAILED STRATEGY IN THE UNITED STATES1
Historical Quasi-BrandsAmerican HomeAvondaleBig KChef's PrideChip MatesClover ValleyCommand PerformanceCool CupsCost CutterCountry ClubCountry MarketCountry OvenDel BuenoDeli ChefDrink AidEmbassyEnjoy
Mi-T-FineNature's DelightOld WorldPet PridePolar PakSilver PlatterSpotlightSpringdaleSun GoldSwansoftTasty BlendThrift TownTown CreekVillage BakeryWishboneYubiNumerous others
Current Brands
Private Selection
Kroger
Various Recently Acquired Store’s Store Brands- Ralphs
- King Soopers- Fred Meyer
- Others
F.M.V.(For Maximum Value)
FleeceFlorida ChoiceFresh CatchFres-ShoreGeneral StoreGold CrestGolden CrownGood TimeGrilltimeHarvest DayHeartlandHeritage HouseHillcrestHome PrideJubileeKrogoKwick Krisp
AmbisenseBandoleroBel-AirBreakfast GemsBrocadeBrown DerbyBusy BakerCanadian HillCanadian PrideCanterburyCaptain's ChoiceCasa del PuebloCastle CrestChee-ZipCoffeetoneCold BrookCozy-LegsCragmontCrown ColonyDe Luxe
Pirates CoveReal RoastSatis-fryScotch BuyScotch TreatSea TraderSenoritaSnow StarStanton'sSunny BrookTartan RoyalTempestTown HouseTrader HornTrophyTruly FineVerdiWhite MagicWinner's CupNumerous others
EdwardsEvergreenFidelisFrappeGardensideGreat EscapesHawthornHi CountryHighwayKeentexLucerneMaison BlancMarigoldMorning StarMrs. Wright'sNob HillOzarkParty PridePavlovaPiedmont
Safeway Select+ Sub-Brands
Safeway+ Sub-Brands
Various Recently Acquired Store’s Store Brands- Vons
- Dominick’s- Others
1. Quasi-Brands also failed at A&P, Albertsons, Publix, Finast, and Grand Union, among others, and are in the process of failing at Winn-Dixie
16
Private Label
Private Label
Store brands, where all private label carries the name of the store, have been very successful at driving high levels of private label penetration in supermarkets
STORE BRAND: STRENGTHS & WEAKNESSES
Strengths
• Strong visual identity
• Clear brand message
• Association of product with store
• Demonstrated track record of success at increasing sales presentation
– All supermarkets with private label share 40%+ use this strategy1
– Can drive sales and profits– Able to support higher prices
• Product quality defects reflect on store image
• Can reduce appearance of selection and range
• Requires significant investment of time, effort and resources over an extended period to succeed
– Market research– Brand development– Brand management– Brand advertising– In-store support– New product development
Weaknesses
1. Supermarkets only: includes Sainsbury, Tesco, Migros, Co-op Swiss, Safeway (UK), Asda, Marks&Spencer, Morrisons and Shaw’s; excludes limited assortment discounters
17
Private Label
Private Label
Group brands, where all private label carries a common non-store name, are most commonly used by retailers with more than one store fascia
GROUP BRAND: STRENGTHS & WEAKNESSES
Strengths
• One brand can be used by multiple-fascia retailers and wholesalers across all stores
• Spreads product and packaging development costs over larger base
• Create group visual identity
• Some association of product with store
• Track record of increasing private label sales penetration
– Can drive sales and profits– Able to support higher prices
• Brand is not directly associated with store fascia
• Can reduce appearance of selection and range
• Requires significant investment of time, effort and resources over an extended period to succeed
– Market research– Brand development– Brand management– Brand advertising– In-store support– New product development
Weaknesses
18
Private Label
Private Label
IIb. Through trial and error, most major supermarket chains appear to be evolving toward a two-tier, value added private label strategy
– Each of the two main strategies, Quasi-Brands and Store or Group Brand, has a number of potential sub-strategies
– Almost every strategy conceivable is being (or has been) used by some retail group
– Private label appears to evolve through a number of distinct stages
– Many leading chains have gone through most stages at one point or another
– As retailers become more sophisticated, the role of private label in their stores changes from that of a vindictive price-fighter to being a value-added marketing differentiator
19
Private Label
Private Label
Each of the two main strategies, Quasi-Brands and Store or Group Brand, has a number of potential sub-strategies
Uniform BrandPure
Endorsed1 Brand + Sub-Brands1
Two-tier Brands
POTENTIAL PRIVATE LABEL STRATEGIES
Mixed Strategy
Store or Group Brand(s)Quasi-Brands
Private label products under separate brands, but small retailer logo used to give consumer assurance
Private label products under separate invented brands, with no link to store or group
All private label products under a uniform store or group brand clearly identified with store
Private label products sold under two (or more) distinct and separate brands, usually mainstream and budget
All private label products under a uniform store or group brand , however some strong sub-brands are created
Private label products sold under two (or more) distinct and separate brands, which in turn have sub-brands
1. The difference between an endorsed quasi-brand and a store or group sub-brand is related to the relative strength of the store or group identity on the packaging
20
Private Label
Private Label
Almost every strategy conceivable is being (or has been) used by some retail group
Mixed Strategy
Two-tier Brands
AldiDansk/Netto
LidlNorma
Winn-DixieSafeway (1940-1985)Auchan (1960-1990)
Marks & Spencer (St. Michael)AlbertsonsFood Lion
PublixCostco
Safeway (US; 1985-1993)Auchan (1990-1998)
Sainsbury/Shaw’sTesco
Safeway (UK)CasinoAuchan
Wegman’sTrader Joe’s (Aldi)
LoblawKrogerAhold
Safeway (US)
CarrefourA&P
Wal-Mart
SELECT COMPANIES PRIVATE LABEL STRATEGIES
Uniform Brand
Brand + Sub-Brands
Pure
Endorsed
Store or Group Brand(s)Quasi-Brands
21
Private Label
Private Label
Private label appears to evolve through a number of distinct stages
FirstGeneration
Type
Objective
Characteristics
Supplier
• Generic
• Increase margins• Provide lower price product
for consumer during inflationary times
• Low-volume functional product
• Technology lagging behind market leader
• Perceived as lower quality/inferior image
• Price as necessity to attract consumer
• National manufacturers, partly specializing in private label
Source: Marketing Stratégique (Chetochine); McKinsey; Coriolis analysis
EVOLUTION OF PRIVATE LABEL
• Quasi-brands
• Reduce manufacturers’power by setting the entry price
• Increase margins• Provide a better-value
product (quality/price)
• Large volume one-off product
• Technology lagging behind market leader
• Average quality (but perceived as lower)
• Price is major criterion for purchase
• Self-manufacture in own plants (e.g. bread, dairy)
• National manufacturers, partly specializing in private label
• Umbrella Brand (group or store fascia)
• Enhance total category margins
• Expand product assortment• Build retailer’s image among
customers
• Big category products• Expand the number of SKUs• Technology close to market
leader• Quality/image in line with
leading brands• Quality and price as criteria
for purchase
• National manufacturers mostly specializing in private label
• True ‘brand’ shaped using traditional brand management techniques
• Segmented private label sub-brands
• Increase and retain customer base
• Enhance total category margins
• Image-forming groups• Many SKUs, but with small
volumes• Innovative technology• Quality/image equal or
superior to leading brands• Better products as criterion
for purchase
• International manufacturers, mostly specializing in private label
SecondGeneration
ThirdGeneration
FourthGeneration
22
Private Label
Private Label
Many leading chains have gone through most stages at one point or another
EXAMPLES OF SELECT COMPANIES EVOLVING PRIVATE LABEL STRATEGIES
StoreBrand
Multiple Quasi-Brands Generic Endorsed
Quasi-BrandsTwo-tier
Store BrandTwo-tier
Store Brand+ Sub-Brands
GroupBrand
Multiple Quasi-Brands Generic Store Brand &
Quasi-BrandsTwo-tier Store
Brand &Group Brand
Three-tierGroup & Store
Brands
StoreBrand
Multiple Quasi-Brands Generic Two-tier
Group BrandsTwo-tier
Group Brands+ Sub-Brands
Multiple Quasi-Brands Generic Store Brand &
Quasi-BrandsTwo-tier Store
Brand &Group Brand
Three-tierGroup & Store
Brands
Multiple Quasi-Brands Generic Store
BrandMultiple
Store Brands
Multiple Quasi-Brands
Store Brand &Quasi-Brands
StoreBrand
Store Brand
+ Sub-Brands
StoreBrand
Multiple Quasi-Brands
23
Private Label
Private Label
As retailers become more sophisticated, the role of private label in their stores changes from that of a vindictive price-fighter to being a value-added marketing differentiator
Vindictive
Objective of private label
Key
Operational Imperative
Supplier Relationship
• Reduce power of manufacturer by reducing their volume and brand franchise
• Match competitors prices /eliminate smaller competitors
• Price
• Low cost operation
• Periodic auctions
Source: Marketing Stratégique (Chetochine); McKinsey; Coriolis analysis
ROLE OF PRIVATE LABEL FOR RETAILER
Margin Booster Marketing Differentiation
• Enhance category margins
• Replace tertiary brands with private label
• Price-value
• Cost management
• Periodic auctions or self-manufacture
• Differentiate product offer from competitors through points-of-difference
• Build a differentiated store image
• Value-added (Value and quality)
• Need for marketing and technical skills
• Strong long term relationship between retailer and manufacturer
24
Private Label
Private Label
III. Retailers with a strong value-added private label strategy are stronger competitors and produce better financial results
IIIa. Private label appears to be most successful in countries, retailers and categories where it offers good quality at a good price rather than average quality at a low price
IIIb. In the past, countries have generally gone down either of two potential private-label pathways: value-adding or price-fighting
IIIc. The success of British retailers at neutralizing the threat of the German discounters appears to demonstrate the superiority of the value-adding position
25
Private Label
Private Label
IIIa. Private label appears to be most successful in countries, retailers and categories where it offers good quality at a good price rather than average quality at a low price
– Private label has been more successful in some categories than in others– Private label is most successful in categories where consumers have no brand
preference; growth in strong brand categories takes time and effort– Private label is most successful in categories with low-innovation by manufacturers– Even in the UK, with high overall penetration, private label is more successful in
some categories than in others
– There is strong evidence that consumers will pay relatively more for better quality private label
– Although it is counter-intuitive, evidence from the UK shows that private label has the highest penetration in the categories where the price difference is lowest
– The measure of a successful private label program is not how cheap it is, but how expensive
– Done right, private label has the capability to dramatically re-divide the available industry profit pool
26
Private Label
Private Label
Private label is most successful in categories where consumers have no brand preference; growth in strong brand categories takes time and effort
ProductCharacteristics
Consumer Behaviour
Private Label Characteristics
Examples
No Preference• Undifferentiated commodity
products• No performance difference
between brands
• Consumers may recognise brands but do not differentiate between them
• No sense of loss if consumer fails to find known brand
• Fast share growth• Low investment• Products feed off store traffic
• Milk & butter• Paper products• Flour
CONSUMER BRAND PREFERENCE AND PRIVATE LABEL
Relative Preference Absolute Preference• Product differentiation created
through marketing mix:- advertising- promotion- merchandising
• Purchase decision made at point-of-sale from repertoire of brands
• Sensitive to in-store promotion and display
• Share growth takes time and effort
• In-store support critical• Image of store carries over to
image of brand
• Film• Household cleaners• Cold beverages
• Innovative or complex product technology
• Items with unique flavour profile
• Consumers may switch stores to get preferred brand
• Consumer needs full confidence in store and product
• Share growth is difficult• High investment in time and
resources - media support required
• Products draw customers to store
• Sub-branding often used
• Razors• Chewing Gum• Cigarettes
27
Private Label
Private Label
Private label is most successful in categories with low-innovation by manufacturers
0%
10%
20%
30%
40%
50%
60%
70%
0% 10% 20% 30% 40% 50% 60% 70% 80%
Deep-frozen food
YogurtCoffee
ChocolatePasta
Rice
Oil
Cheese
Syrup
PRODUCT INNOVATION VS. PRIVATE LABEL PENETRATION(Percent; France; 1993)
Product Innovation% of products introduced in past 5 years
Penetration of Private Label% of category sales
Source: BCG
28
Private Label
Private Label
Even in the UK, with high overall penetration, private label is more successful in some categories than in others
65.4%
52.1%48.6%
19.6%15.5%
Dairy Paper Products Frozen Household AlcoholicBeverage
Dry Grocery Cold Beverage Health &Beauty
Confectionery
UK PRIVATE LABEL SHARE BY MAJOR CATEGORY(Percent of sales; 1998)
Average1
43.2%37.6% 36.8% 36.1%33.3%
1. 1998 data (2000: 45.0%) Source: PLMA; Coriolis analysis
29
Private Label
Private Label
Although it is counter-intuitive, evidence from the UK shows that private label has the highest penetration in the categories where the price difference is lowest
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
0% 10% 20% 30% 40% 50% 60% 70%
PRIVATE LABEL DISCOUNT VS. PRIVATE LABEL SHARE BY CATEGORY (Percent; UK market; 1998)
Private Label Share(% of sales)
Discount vs.Category Average
(% savings)
Confectionery
Health & Beauty
Cold Beverage
HouseholdDry Grocery
Paper Products
Dairy
AlcoholicBeverages
Frozen
Source: PLMA; Coriolis analysis
30
Private Label
Private Label
The measure of a successful private label program is not how cheap it is, but how expensive
-16% -17% -17%
-59%
-53%
-62%
Tesco Sainsbury Safeway
-29%
-34%
-27%
-18%
-51%
-58%
-44%
Carrefour Leclerc Auchan Casino
AVERAGE DISCOUNT VS. BRAND LEADER BY TYPE OF PRIVATE LABEL(Percent price discount vs. brand leader by type of private label; 1998)
United Kingdom France
1. Sample of three not fourSource: Euromonitor; Coriolis analysis
MainstreamPrivate label
BudgetPrivate label
SampleAverage
16.7%
SampleAverage
27.0%
SampleAverage
58.0%
SampleAverage1
51.0%
Price of Brand Leader
31
Private Label
Private Label
Done right, private label has the capability to dramatically re-divide the available industry profit pool
80%
65%60%
2%
1%2%
18%
34% 38%
1982 1990 2000
Manufacturer
Wholesaler
Retailer
CHANGE82-00
+20%
100% 100%100%
REDIVIDING THE UK FOOD INDUSTRY PROFIT POOL(Percent of total UK food industry operating profit; 82v90v00)
Source: OC&C Strategy Consultants; Coriolis analysis
-%
-20%
25% 32% 45%Private Label % of Sales
32
Private Label
Private Label
IIIb. In the past, countries have generally gone down either of two potential private-label pathways: value-adding or price-fighting
– There appear to be two distinct private label positions: Value-Adding (high price/high margin) or Price-Fighting (low price/low margin)
– Both market positions have their strengths and weaknesses
– The strategy used appears to reflect market history and the competitive environment in the country
– The intense focus on price by full-service supermarkets in Germany appears to have limited their private label growth, partly reflecting the distorting presence of Aldi in their market
– Countries with two very strong supermarket groups usually see the development of value-added private label strategies
33
Private Label
Private Label
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
10% 15% 20% 25% 30% 35% 40% 45%
There appear to be two distinct long-run private label positions: Value-Adding (high price/high margin) or Price-Fighting (low price/low margin)
AVERAGE DISCOUNT VS. PRIVATE LABEL PENETRATION(% price discount vs. brand leader; % of supermarket sales; 2000)
United Kingdom
Germany
Belgium
France
Spain
Netherlands
Average Price Discount v. Brand Leader
Private LabelShare of Total Supermarket
Sales
Source: PLMA; Nielsen; M+M Eurodata; Euromonitor; FAS; Coriolis analysis
Value-Adding
Price-FightingUnited States
AustraliaNew Zealand
Switzerland
Italy
Austria
34
Private Label
Private Label
Both market positions have their strengths and weaknesses
Price-FightingBranding Used
Advantages
Disadvantages
Key Requirements
Example
Value-Adding• Quasi-Brands
• Maintain price parity with hard discounters
• Strong price impression versus branded
• Cannot afford to pay for higher quality products/ingredients
• Limited to select categories– Undifferentiated commodities– Highly price sensitive items
• Does not provide differentiated product or reason to choose outlet
• Low cost store operations• Low cost distribution infrastructure
• Germany• Austria
• Store or Group Brands
• Much higher margins and profitability
• Draw customer with unique signature items
• Hard to implement• Requires large commitment of
resources and personnel • Limited price impression vs.
competition
• Store-as-a-brand attitude• Extensive marketing and
advertising expenditure• Continual product/packaging
development costs
• United Kingdom• Switzerland
DIFFERENCES BETWEEN STRATEGIES
35
Private Label
Private Label
The intense focus on price by full-service supermarkets in Germany appears to have limited their private label growth…
PRIVATE LABEL SHARE BY MAJOR RETAILER:UNITED KINGDOM VS. GERMANY(Percent price discount vs. brand leader by type of private label; 2000)
United Kingdom Germany
59%55% 54% 52% 51%
36%
Sainsbury Safeway Asda Tesco Morrisons Somerfield
95%90%
29%
7%
Aldi Lidl Edeka Rewe MetroTengelmann1
NationalAverage
45.0%
NationalAverage
23.0%
1. Tengelmann’s total private label share is inflated by its limited assortment chain Plus Source: Nielsen; Euromonitor; M+M Eurodata; FAS; Coriolis analysis
18% 16%
36
Private Label
Private Label
… partly reflecting the distorting presence of Aldi in their market
– “German supermarkets think they have to position themselves at the bottom to compete with Aldi.”
Barry Leach, A.T. Kearny, Munich
– “I am amazed that German supermarkets haven’t counteracted Aldi’s hard discount prices with quality.”
Philippe Kaas, OC&C Strategy Consultants, Paris
37
Private Label
Private Label
Countries with two very strong supermarket groups usually see the development of value-added private label strategies
Migros39%
Coop Swiss36%
Pick Pay9%
Waro3%
Other13%
SUPERMARKET MARKET SHARE BY SELECT COUNTRY(% supermarket sales; 2000)
Switzerland
Ahold1
49%
Laurus36%
Superunie18%
Aldi6%
Other3%
Netherlands
1. Includes TSN, 73% owned by AholdSource: Nielsen; Euromonitor; M+M Eurodata; Elsiver; FAS; Coriolis analysis
Germany AustriaEdeka/AVA
16%
Rewe15%
Aldi12%
Metro11%
Tengelmann11%
Lidl7%
Spar6%
Other33% Rewe
27%
Spar24%Zev
17%
Adeg13%
Aldi13%
Other6%
Value-Adding
Price-Fighting
Top 275%
Top 285%
Top 251%
Top 231%
38
Private Label
Private Label
IIIc. The success of British retailers at neutralizing the threat of the German discounters appears to demonstrate the superiority of the value-adding position*
– All of the major British chains, except Waitrose, launched a line of low-priced private label products in response to the arrival of Aldi, Netto and Lidl
– These brands were priced at parity with the continental discounters, leading to very big price gaps in many key categories
– Since it’s height, budget private label’s share in the UK as fallen, while the overall share of private label has risen
– The United Kingdom appears to be the country that has most successfully neutralized Aldi’s market entry
* There is also growing evidence that a strong store differentiation based on private label is an effective defense against Wal-Mart
39
Private Label
Private Label
All of the major British chains, except Waitrose, launched a line of low-priced private label products in response to the arrival of Aldi, Netto and Lidl
Group
Sainsbury
Tesco
Asda
Safeway
Somerfield
Waitrose
Kwik Save
Iceland
UK VALUE BRANDS LAUNCHED IN EARLY 1990’S
Mainstream Brand Value Brand
Sainsbury’s
Tesco
Asda
Safeway
Somerfield
Waitrose
-
Iceland
Sainsbury’s Essentials
Tesco Value
Farm Stores
Safeway Savers
Basics
-
No Frills
Super Value
40
Private Label
Private Label
These brands were priced at parity with the continental discounters, leading to very big price gaps in many key categories
Source: Journal of Brand Management; Coriolis analysis
UK VALUE BRANDS INITIAL PRICE POSITIONING(Price of brand leader = 100; 1995)
Colas Tea Bags Baked Beans
BrandLeader 100
80MainstreamPrivate Label
39
BudgetPrivate Label
BudgetBrands
29
BrandLeader 100
85MainstreamPrivate Label
52
BudgetPrivate Label
BudgetBrands
28
BrandLeader 100
77MainstreamPrivate Label
36
BudgetPrivate Label
BudgetBrands
26
41
Private Label
Private Label
Since it’s height, budget private label’s share in the UK as fallen, while the overall share of private label has risen
68.0%61.0%
55.0%
9.1%
7.6%
32.0% 29.9%37.4%
1990 1995 2000
MainstreamPrivate Label
Budget Private Label
BrandedProducts
100% 100%100%
UK MARKET SHARE BY TYPE OF BRAND(Percent of sales; 90v95v00)
Source: AGB; Coriolis analysis
42
Private Label
Private Label
The United Kingdom appears to be the country that has most successfully neutralized Aldi’smarket entry
Germany
Austria
Netherlands
United States
Denmark
France
United Kingdom
1945
1967
1972
1976
1980
1987
1990
YearAldi
Entered
EXAMPLES OF ALDI MARKET ENTRY
Hard DiscountMarket share
3,263
220
359
554
456
385
254
# of Hard Discount outletsAldi Total
14,600
445
638
1,600
456
1,412
474
12%
13%
6%
0.6%
4%
1.1%
1.1%
Aldi Total
32%
17%
10%
1.1%
10%
4.3%
2.1%
Private label% of retailfood sales
28.0%
21.1%
27.6%
15.5%1
25.5%
22.4%
45.0%
1. Significantly higher at major retailers (e.g. Safeway 29%) Source: Euromonitor; M+M Eurodata; Nielsen; various other; Coriolis
43
Private Label
Private Label
Appendix: Case Studies
Case Study I: Tesco A3
Case Study II: Safeway (US) A15
Case Study III: Loblaw A33
44
Private Label
Private Label
Private label has played an important role at three successful international retailers
12.8%
8.7%
8.8%
THREE CASE STUDIES PERFORMANCE PROFILE
SalesCAGR(91-00)
EBITCAGR(91-00)
13.7%
20.3%
18.1%
5.6%
7.1%
4.9%
550%
2,016%
783%
EBITMargin(FY00)
10 YearStockPrice
Growth
Source: Wrights; Various annual reports; Coriolis analysis
Change inEBIT
Margin(91-00)
+0.4%
+4.3%
+2.3%
45
Private Label
Private Label
46
Private Label
Private Label
£7.1£7.6
£8.6
£10.1
£12.1
£13.9
£15.9
£17.2
£18.8
£21.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Tesco has shown constant strong sales growth for the past ten years
TESCO SALES GROWTH1
(£Billions; 1991-2000) CAGR91-0012.8%
1. Uses Fiscal years (i.e. 2000 = YE 3/01); excluding VATSource: Tesco Annual Reports
47
Private Label
Private Label
£0.6£0.7
£0.7
£0.9
£1.0£1.1
£1.3
£1.4
£1.5
£1.6
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Tesco has also shown strong EBITDA growth for the past ten years
TESCO EBITDA GROWTH1
(£Billions; 1991-2000) CAGR91-0012.0%
1. Uses Fiscal years (i.e. 2000 = YE 3/01); excluding VATSource: Wrights
48
Private Label
Private Label
Tesco has gained over six points of market share in the UK in the past decade
TESCO UK MARKET SHARE GROWTH1
(Percent of total industry sales; 1990-2000)CHANGE
90-00+6.1%
1. Defined as primarily food and drug retailers including convenience; in 2000 Tesco has a share of 24.8% of supermarket sales Source: IGD
9.7% 9.9% 10.1%
11.4%
13.4%14.2%
14.8%15.2% 15.4% 15.6% 15.8%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
49
Private Label
Private Label
Tesco’s share price has increased 550% in the past decade
TESCO SHARE PRICE GROWTH(pence/share; share trades millions; 1991-2000)
Source: Big Charts
50
Private Label
Private Label
Tesco is rapidly expanding internationally and now has operations in ten countries
TESCO COUNTRIES OF OPERATION
Europe Asia
United KingdomRepublic of Ireland
HungaryPoland
SlovakiaCzech Republic
ThailandSouth Korea
Taiwan[Malaysia]
51
Private Label
Private Label
The United Kingdom, which still accounts for 87.6% of total sales, is funding international growth
TESCO ORGANISATIONAL STRUCTURE(FY 20001)
1. Uses Fiscal years (i.e. 2000 = YE 3/01)Source: Tesco Annual Report
Tesco PLCSales: £20,988OP: £1,174OP Margin: 5.6%
United KingdomSales: £18,372OP: £1,100OP Margin: 6.0%
Rest of EuropeSales: £1,756OP: £70OP Margin: 4.0%
AsiaSales: £860OP: £4OP Margin: 0.5%
Supermarkets 312
FinancialServices
Tesco.com
Superstores 274
Hypermarkets 23
Metro 38
Express 45
Ireland 76
Hungary 45
Poland 40
Slovakia 10
Czech 10
Thailand 24
South Korea 5
Taiwan 1
Malaysia
• 2m customers
• 900,000 credit cards
• 400,000 savings accounts
• 1m customers
• £300m annualisedsales
52
Private Label
Private Label
21%23%
26%
30%
34% 34% 34%31%
34% 35%37%
39% 40%43%
45% 46% 45%47% 48%
51% 52%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
A strong and growing private label programme has been one of the key elements of Tesco’ssuccess
TESCO PRIVATE LABEL PERCENT OF SALES1
(Percent of sales; 1990-2000)CHANGE
80-00+32%
1. Defined as branded food and non-food sales Source: Taylor Nelson AGB; Nielsen; Euromonitor; Coriolis analysis
53
Private Label
Private Label
While all private label products are labeled Tesco, the company uses four sub-brands to segment the market
TESCO PRIVATE LABEL BRANDS
# oflines
Sales(£M;00)
500
560
3,000
200
£350M
£300M
£5,525M
£1,175M
% of PLSales
5%
4%
75%
16%
Strategy– Directly address Marks&Spencer– Super-premium product and price– Limited to high-value added items
– Attract upmarket shoppers– Capture margin in new category– Aim to provide complete basket
– Same quality as national brand– To be the brand to choice– Increase margins vs. branded
– Directly address Aldi/Netto/Lidl– Cheap and basic– Limited to low-value added items
Source: Tesco annual reports; various press articles; Coriolis analysis
54
Private Label
Private Label
However, not all sub-brands are available on all products
TESCO PRIVATE LABEL BRANDS EXAMPLES
55
Private Label
Private Label
Tesco sees private label as a key element of its success
– “Tesco selects, prepares and packages everyday products in dozens of different ways –from fresh to frozen, from value packs to gourmet treats, from raw ingredients to ready meals. We are continually innovating and investing in new lines to increase choice for our customers… The Tesco Finest range, introduced in February last year, has been a great success.”
Tesco Annual Report 1999
56
Private Label
Private Label
Store brands and sub-brands
Store brands and sub-brands
Two-tier brands +pseudo brands
Store brands and sub-brands
Store brands + generic
All of the major retailers in the United Kingdom now have strong private label programs based on using their store name as the brand
Company
Tesco
Sainsbury
Asda
Safeway
Somerfield
PL Strategy Brands Used
TescoTesco sub-brands (Value, Organic, Finest)
SainsburySainsbury sub-brands (Novon, Gio, etc.)
ASDASmart Price (replacing Farm Stores)George (apparel)
Safeway The BestSafewaySafeway SelectSafeway Savers
SomerfieldKwik Save and No Frills (Kwik Save)
TOP FIVE UK SUPERMARKET GROUPS PRIVATE LABEL STRATEGIES
Private Label % of Sales
51.8%
59.2%
54.2%
54.8%
36.0%
57
Private Label
Private Label
(USA)
58
Private Label
Private Label
$15.1 $15.2 $15.2 $15.6$16.4
$17.3
$22.5
$24.5
$28.9
$32.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Safeway was showing limited sales growth until a recent series of major acquisitions
SAFEWAY SALES GROWTH($Billions; 1991-2000) CAGR
91-008.7%
Source: Safeway Annual Reports
CAGR91-962.7%
CAGR96-0016.7%
59
Private Label
Private Label
$0.7 $0.8 $0.8$0.9
$1.1$1.2
$1.7
$2.1
$2.8
$3.1
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
However, Safeway was showing good profit growth, which gave it the ability to do acquisitions
SAFEWAY EBITDA GROWTH1
($Billions; 1991-2000) CAGR91-0012.0%
Source: Wrights
CAGR91-9610.5%
CAGR96-0026.1%
60
Private Label
Private Label
72.8% 72.8% 72.8% 72.4% 71.5% 70.9% 70.5% 70.3%
24.3% 23.3% 22.7% 22.5% 22.9% 22.6% 22.6% 22.6%
2.9% 3.9% 4.4% 5.2% 5.7% 6.5% 6.9% 7.1%
1993 1994 1995 1996 1997 1998 1999 2000
COGS
Operations &Administrative
Operating Profit +4.2%
-1.7%
-2.5%
BREAKDOWN OF MARGINS
Safeway has improved its operating profit consistently quarter after quarter, year after year, since Steve Burd was appointed CEO and the Safeway Select range was launched
Source: Safeway Annual Reports
61
Private Label
Private Label
SAFEWAY ACQUISITIONS
AcquisitionYear Sales
# ofStores
Average US$/store/wk
Date ofAcquisition
April 1997 $5.4B 320 $325,000
Nov 1998 $2.6B 116 $432,000
April 1999 $0.6B 49 $237,000
Sept 1999 $2.6B 117 $428,000
Dec 1999 $1.0B 39 $494,000
The demonstrated ability to improve results allowed Safeway to make acquisitions
Source: Safeway Annual Reports; various press articles; Coriolis analysis
62
Private Label
Private Label
(49%)
Safeway’s acquisitions have served to expand its geographic coverage
SAFEWAY REGIONS OF OPERATION
63
Private Label
Private Label
Safeway is now the number one or two in thirteen of its eighteen major markets
San Francisco, CASan Jose, CAOakland, CASacramento, CAPortland, ORSeattle, WAPhoenix, AZLas Vegas, NVDenver, COWashington, DCBaltimore, MD
Los Angeles, CASan Bernadino, CAOrange County, CASan Diego, CA
Chicago, IL
HoustonDallas, TXFort Worth, TX
#1#1#2#2#1#1#2#3#2#2#3
#2#4#3#1
#2
#2#2#4
MarketPositionMarketCompany
SAFEWAY POSITION IN KEY MARKETS IN 2000
Source: MMS
64
Private Label
Private Label
0
10
20
30
40
50
60
70
26/0
4/90
26/0
8/90
26/1
2/90
26/0
4/91
26/0
8/91
26/1
2/91
26/0
4/92
26/0
8/92
26/1
2/92
26/0
4/93
26/0
8/93
26/1
2/93
26/0
4/94
26/0
8/94
26/1
2/94
26/0
4/95
26/0
8/95
26/1
2/95
26/0
4/96
26/0
8/96
26/1
2/96
26/0
4/97
26/0
8/97
26/1
2/97
26/0
4/98
26/0
8/98
26/1
2/98
26/0
4/99
26/0
8/99
26/1
2/99
26/0
4/00
26/0
8/00
26/1
2/00
Safeway’s share price has increased 2,016% in the past decade
1. Adjusted for stock splitsSource: Big Charts
$2.90
$61.37
Steve BurdAppointed$2.78
SAFEWAY SHARE PRICE GROWTH1
(US$ per share; 4/90-1/01)
65
Private Label
Private Label
Safeway has extensive private label manufacturing operations, stores in the United States and Canada, and owns 49% of Casa Ley of Mexico
SAFEWAY ORGANISATIONAL STRUCTURE(FY 2000)
Source: Safeway Annual Report and company information; Coriolis analysis
Safeway Inc.Sales: $31,977OP: $2,282OP Margin: 7.1%
United StatesSales: $28,534OP: $2,082OP Margin: 7.3%
CanadaSales: $3,443OP: $200OP Margin: 5.8%
Casa Ley
(Mexico)
Milk plants 10
Manufacturing(Glencourt Ltd.)
Bread plants 8
Ice Cream plants 6
Meat & Cheese plants 3
Soft Drink Bottling plants 4
• 97 stores
Fruit & Vegetable processing plants 5
Other Food plants 4
Pet Food plants 1
49%
• 315 stores• 1,473 stores
• Supplies 50% of PL sales
66
Private Label
Private Label
A strong and growing private label programme has been one of the key elements of Safeway’s success
SAFEWAY PRIVATE LABEL PERCENT OF SALES1
(Percent of sales; 1990-2000)
CHANGE90-00+7.5%
1. Defined as scanned food and non food; excludes store-prepared perishables (e.g. fresh meat)Source: Deutsche Bank; JP Morgan; Supermarket News; Private Label Magazine; Coriolis analysis
21.5% 21.5% 22.0% 22.0% 22.5% 23.0%24.0%
25.0%26.5% 27.0%
29.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
67
Private Label
Private Label
Safeway has tried just about every possible private label strategy
EVOLUTION OF SAFEWAY’S PRIVATE LABEL PROGRAM
Stage IStore Brand
1926-1940
Safeway
Strategy
Time Period
Brands
ControlledLabels
1940-19681980-1985
CragmontEdwards
Town HouseLucerneBel-AirVerdi
Truly FineMarigoldPiedmont+47 others
Stage II Stage IIILow-priceGenerics
1968-1980
Scotch Buy
Stage IVEndorsed
Labels
1985-1993
Stage VStore Brand+ Premium
1993-Current
Safeway(sub-brands)
Safeway Select
(sub-brands)
68
Private Label
Private Label
Safeway recognizes the appeal of good quality at good prices to its customers
– “Private label today is far different from what it was 10 years ago when we as retailers felt the only thing important in private label was price and quality was second. Quality must be in the forefront and you have to price it so that it represents a real value to the consumer, otherwise there is no reason for being. The U.S. has the potential to reach the market penetration of private label in Canada and in Europe - where the bar is high - but the American consumer is absolutely going to be the one that dictates what that level is going to be.”
Gary Smith, SVP Marketing, Safeway Stores
69
Private Label
Private Label
Safeway uses a two-tiered private label program with a few sub-brands under each tier
SAFEWAY PRIVATE LABEL BRANDS
# oflines
Sales($B;00)
900
200
2,200
300
$2.5M
$5.0M
% of PLSales
34%
66%
Strategy– Quality as good as market leader– Capture margin in new category– Increase margins vs. branded
– Create a unique signature item– Super-premium product and price– Limited to high-value added items
– Same quality as national brand– Basic choice for everyday needs– Increase margins vs. branded
– Two strong heritage sub-brands– Leveraging manufacturing plants– Limited in-store competition
Source: various press articles; Coriolis analysis
Mrs. Wright’sLucerne
70
Private Label
Private Label
As the Safeway Select brand was being developed, the number of Store Brand items decreased, until recent acquisitions increased the range again
Source: San Francisco Chronicle; Private Label Buyer; Supermarket News; Coriolis analysis
CHANGING SAFEWAY PRIVATE LABEL RANGE(Number of skus; 1993v1997v2000)
2,1001,800
2,500
250650
1,100
1993 1997 2000
2,3502,450
3,600
71
Private Label
Private Label
Safeway uses store brands for basic items and Select for premium lines
SAFEWAY PRIVATE LABEL BRANDS EXAMPLES
Mrs. Wright’sLucerne
72
Private Label
Private Label
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
The United States market demonstrates the potential of the relationship between private label and profitability
Source: Various companies annual reports; JP Morgan; Private Label Buyer magazine; Supermarket News; various press articles; Coriolis analysis
PRIVATE LABEL VS. PROFITABILITY IN AMERICAN SUPERMARKETS(Percent of total sales private label; EBITDA percent of sales; FY2000)
Albertsons
Safeway
Weis MarketPublix
A&P
EBITDAMargin
% of sales private label
Kroger
Wal-Mart
Pathmark
Supervalu
Winn-Dixie
Costco Penn TrafficGrand Union
FlemingSmart & Final
73
Private Label
Private Label
Private label as a key element to Safeway’s success
– “Safeway has been early at rationalizing and upgrading its private label program. It is also early at recognizing the potential for future development. A leader in private label, the company has aggressively expanded its private label, introducing 195 new items in FY 1999. The company has developed distinct brands and sub-brands that have gained increased customer acceptance due to their superior quality. We believe that the richer margin mix on these products has translated and will continue to translate into bottom-line growth but also provides a major reinforcement in the branding of the company.”
Deutsche Bank, May 2000
– “The exciting thing about Safeway Select is that it has enjoyed instant recognition and popularity. The new cola has been described as ‘a home run,’ and the chocolate chip cookie is the No. 1 or No. 2 best-selling cookie in every division. Our impression is that the success of the Safeway label is more than partly due to the high-quality interiors and superior service found in Safeway stores.”
Mark Husson, Analyst, JP Morgan
74
Private Label
Private Label
Two-tier group brands + pseudo brands1
Three-tiered group and store brands
Store brands
Store brands and sub-brands
Group brand
Sam’s Choice (grocery)Great Value (grocery)Ol’ Roy (dog food), Special Kitty (cat food)White Cloud2 (tissue)
Private SelectionBanner Brands (Kroger, Ralph’s, King Sooper)FMV (For Maximum Value)
Albertsons, Jewel, Albertsons-Osco (OTC drugs)
Safeway Select, Safeway Select sub-brandsSafeway, Safeway sub-brands Vons, Dominick’s
Kirkland Signature
All of the major American supermarket groups now have a private label program broadly similar to Safeway’s
Company
Wal-Mart
Kroger
Albertsons
Safeway
Costco
PL Strategy Brands Used
1. Wal-Mart also has a number of pseudo-brands in non-food: Kathie Lee (apparel), White Stag (apparel), Faded Glory (apparel), Mary-Kate & Ashley (apparel),No Boundaries (cosmetics), Ever Active (Car Batteries) and Popular Mechanics (tools); 2. White Cloud was originally a P&G tertiary brand sold to Wal-Mart
TOP FIVE US SUPERMARKET GROUPS PRIVATE LABEL STRATEGIES
Private Label % of Sales
Grocery 8%Non-food 11%
25%
27%
29%
7%
75
Private Label
Private Label
76
Private Label
Private Label
$7.9 $8.4 $8.5$9.3 $9.4
$10.0 $9.9 $9.8$11.0
$12.5
$18.8
$20.1
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Loblaw demonstrated constant sales growth until its recent acquisitions (primarily Provigo)
LOBLAW SALES GROWTH(C$Billions; 1989-2000)
CAGR89-008.8%
Source: Loblaw Annual Reports
CAGR89-985.2%
CAGR98-0026.9%
77
Private Label
Private Label
For ten years, Loblaw managed to grow EBITDA twice as fast as sales, giving it the credibility to make major acquisitions
LOBLAW EBITDA GROWTH(C$Billions; 1989-2000)
$0.3 $0.3 $0.3 $0.3 $0.3
$0.4$0.4
$0.5
$0.6
$0.7
$1.1
$1.3
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
CAGR89-0014.1%
CAGR89-9810.3%
CAGR98-0033.0%
Source: Loblaw Annual Reports
78
Private Label
Private Label
Loblaw has more than doubled its Canadian market share in the past decade
LOBLAW CANADIAN MARKET SHARE GROWTH1
(Percent of sales; 1990 vs. 2000)
1. Defined as primarily food and drug retailers including convenience and warehouse club stores Source: Canadian Grocer
Loblaw16.8%
Other83.2%
Loblaw37.1%
Other62.9%
1990 2000
79
Private Label
Private Label
Loblaw’s share price has increased 783% over the same time period
LOBLAW SHARE PRICE GROWTH(dollars/share; share trades millions; 6/91-6/01)
Source: Big Charts
80
Private Label
Private Label
Loblaw, owned 63% by George Weston Foods Limited, which is in turn owned 60% by Galen Weston, is both a retailer and a wholesaler
LOBLAW ORGANISATIONAL STRUCTURE(FY 20001)
1. Includes (C$548) intersegment eliminationSource: Loblaw and George Weston Annual Reports
George Weston Ltd.Sales: $22,3441
OP: $1,189OP Margin: 5.3%
Food ProcessingSales: $2,771OP: $221OP Margin: 8.0%
• Supermarkets (298)• Superstores (205)• Warehouse Clubs (103)
• Franchised Stores (736)• Wholesale Accounts (8,252)
Loblaw Ltd.Sales: $20,121OP: $976OP Margin: 4.9%
63% ownership
CorporateStores
Sales: $14,548
Banner Group& Wholesale
Sales: $5,573
81
Private Label
Private Label
Loblaw has a large number of both retail and wholesale store formats and banners
LOBLAW STORE FORMATS AND BANNERS
West East QuebecRetail
Wholesale
82
Private Label
Private Label
C$2.0B
C$2.2M
C$1.1M
C$0.3M
GREENTGTBT
Club PackOrganic
Loblaw uses a two-tiered approach to private label
LOBLAW PRIVATE LABEL BRANDS
Yearlaunched
Sales(C$B;00)
2,800
2,500
1,500
200
% of PLSales35%
40%
20%
5%
Strategy– Launched as inflation fighter– Modeled on Carrefour range– Cheap and basic
– Create a real point of difference– Modeled on Marks&Spencer– Increase margins vs. branded
– Address specific consumer needs– Capture margin in new categories– Segment market
– OTC Pharmaceuticals– Sell through in-store pharmacies– Increase margins vs. branded
# oflines
1978
1983
1996
1989199119881999
C$0.2BC$0.2BC$0.6BC$0.1B
Source: Various Loblaw annual reports; Toronto Star; Private Label Buyer magazine; Canadian Grocer; Coriolis analysis and estimates
83
Private Label
Private Label
As the President’s Choice brand has been developed, the number of ‘no name’ items has decreased
Source: Various Loblaw annual reports; Toronto Star; Private Label Buyer magazine; Canadian Grocer; Coriolis analysis
CHANGING LOBLAW PRIVATE LABEL RANGE(Number of skus; 1988v1993v2000)
3,6003,200
2,800
400 1,0002,500
500
1,500
200
1988 1993 2000
4,000
4,700
7,000
sub-brands
84
Private Label
Private Label
Loblaw invests significant time and resources into its ongoing private label development program and is constantly launching new products and upgrading packaging
LOBLAW PRIVATE LABEL BRANDS EXAMPLES
GREENTGTBT
Club Pack
85
Private Label
Private Label
Dave Nichol, the President behind President’s Choice, copied most of his ideas from successful retailers from around the world
IdeaNo Name generics
President’s Choice
Insider’s Report
President’s ChoiceTV Commercials
SourceCarrefour
Marks&Spencer
Trader Joe’s
Purdue Chicken
OriginalProduits Libres
St. Michaels
Insider’s Report1
“It takes a tough man to make a tender chicken.”
SOURCES OF LOBLAW’S IDEAS
“Dave Nichol wasn’t a brilliant innovator. But as an imitator, he had few rivals.”
- Canadian Business Magazine
1. Trader Joe’s sold Loblaw’s the North American rights to the name “Insider’s Report” and renamed their mailer the “Fearless Flyer”
86
Private Label
Private Label
Loblaw has increased its private label penetration by almost 12% in ten years
1. Defined as scanned food and non food; excludes store-prepared perishables (e.g. fresh meat)Source: Canadian Grocer; Private Label Buyer magazine; Coriolis analysis
Loblaw23.0%
Other77.0%
Loblaw34.9%
Other65.1%
1990 2000
LOBLAW PRIVATE LABEL PERCENT OF SALES1
(Percent of sales; 1990 vs. 2000)
87
Private Label
Private Label
0%
1%
2%
3%
4%
5%
6%
7%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Canada clearly demonstrates the relationship between private label and profitability
Source: Various companies annual reports; Private Label Buyer magazine; Supermarket News; Coriolis analysis
PRIVATE LABEL VS. PROFITABILITY IN CANADIAN SUPERMARKETS(Percent of total sales private label; EBIT percent of sales; FY2000)
Loblaw
Safeway (Canada)
Empire/Sobeys
A&P (Canada)
MetroOperating
profit
% of sales private label
88
Private Label
Private Label
Loblaw sees private label as a key element of its success
– “One of the great strengths of Loblaw Companies is its controlled label program, the foundations of which are no name and President’s Choice. In 1998, Loblaw successfully extended its President’s Choice brand into financial services, consistent with our philosophy of providing more and more everyday household needs while never losing focus on our prime objective of ensuring we are, first and foremost, the best food retailer we can possibly be. In 2001, we will broaden the financial services offering with the introduction of President’s Choice Financial MasterCard. Consistent with our financial services philosophy, President’s Choice Financial MasterCard will be a value-added product with no fees and will allow customers to earn even more PC points towards free groceries and other rewards.”
Loblaw Annual Report 2000
89
Private Label
Private Label
Loblaw’s Canadian competitors have copied it’s premium group brand private label approach
Company
Loblaw
Empire/Sobeys
Safeway
Metro
A&P
PL Strategy
Two-tier group brands
Two-tier group brands
Store brands and sub-brands
Group brands
Store brands + generic
Brands Used
President’s ChoicePresident’s Choice sub-brandsNo NameExact (OTC pharmaceuticals)
Our ComplimentsSmart Choice
Safeway Select, Safeway Select sub-brandsSafeway, Safeway sub-brands
Merit Selection
Master ChoiceSavings Plus
TOP FIVE CANADIAN SUPERMARKET GROUPS PRIVATE LABEL STRATEGIES
Private Label % of Sales
35%
25%
25%
21%
18%